Minimize your currency risk in three easy steps

Note:This is the finale of our three-part series on helping global SMBs overcomethe “Bank Gap” to find better ways to manage their foreign currency risks and payments. Read part one and part two.

There’s one undeniable truth when it comes to doing business globally, and it’s this: Whether you import supplies or sell your products in other countries, your financial success is largely beholden to the whims of the currency markets and how you react to them.

As we talked about in part two of our series, failing to anticipate and adapt to the ever-moving currency markets with a proper currency exposure plan could cost your global business thousands, or even millions of dollars in potentially avoidable currency losses.

The good news is, you have the power to protect your bottom line from currency fluctuation disaster. In our experience helping thousands of businesses with cross-border payments and currency risk management since 2004, we’ve found that the best way to minimize your foreign currency risk is to make a currency exposure plan. Here’s how you start.

Step 1: Find your currency exposure levels

Start by looking at your unique business situation, and figuring out the answers to these questions:

– How much revenue do we generate in non-US countries?
– How much do we spend on imports and paying bills overseas?
– What foreign currencies does my global business deal with?

From here you can find how much foreign currency exposure you currently have, and which foreign currencies you’ll want to watch (For those of you who don’t want to watch the markets, don’t worry — we’ll show you some ways you can skip this step).

If your US business buys or sells in…

Then you may want to watch this currency pair:

United Kingdom

GBPUSD

Europe

EURUSD

Canada

USDCAD

Japan

USDJPY

Australia

AUDUSD

In general, the more foreign currency you send or bring back from other countries, the more currency risk you carry and the more your revenues and profits could be impacted as the currency markets move.

Step 2: Gauge your appetite for currency risk

After you get an idea of your business’ currency exposure, decide how much currency risk you’re willing to stomach.

If a large portion of your revenues or your costs are from your business abroad (i.e. denominated in foreign currency), are you willing to risk a 5% or even 10% loss in overseas revenue if the US dollar were to strengthen 5%-10% versus other currencies over the year? Or are you ready to accept a 5%-10% hike in your import costs or overseas payments if the US dollar were to weaken by that percentage?

If you’re like most, you may decide that putting that much of your business’ money on the line is not acceptable. In which case you may continue to…

Step 3: Use tools that can help protect your bottom line

While you can’t control the currency markets, you do have the power to reduce your currency risk. Here are some valuable currency tools your business can use to navigate currency markets, control your import costs, and help protect your profits from currency loss:

– Forward contracts. Looking for more control over your imports and overseas costs? A forward contract can help you lock in today’s exchange rates for up to three years, so you’ll know what you’ll be paying in dollar terms for your foreign expenses in the future.

For example, let’s say I need to order €100,000 worth of Italian shoes to sell at my shoe store in the US. If today’s exchange rate is $1.15 per euro, it will cost me $115,000 to order the shoes right now. If the euro strengthens to $1.20 over the next quarter, it will cost me $120,000 for the same order of shoes – or $5,000 more than it did before.

But if I were to use a forward contract to lock in the exchange rate at $1.15 per euro, I could keep my import costs at a predictable $115,000 per shoe order (assuming the supplier doesn’t raise their prices) for a fixed period of time – from six months up to three years. That gives me much more certainty when crafting budgets and setting prices.

– Rate alerts. Do you know the exchange rate you want to pay but don’t have time to watch the markets? A rate alert service can help you get a more favorable rate and grab a cost-saving opportunity as you transfer money internationally.

Let’s say euros cost $1.15 each right now, but I want to save on supply costs by waiting until they’re trading at a less expensive $1.05 before I order from my Italian shoe supplier (from our earlier example). A rate alert service could notify me when euros fall to that more favorable rate, so I could use a spot contract to make an immediate payment while saving around 9% on my import costs in this example.

Firm orders. This one’s ideal if you frequently order from an overseas supplier, but only want to pay a certain exchange rate. Going with our earlier example, I could use a firm order to automatically book an order (or all future orders) from my Italian shoe supplier when the exchange rate falls to $1.05 per euro, so I can get a more favorable (and cost-saving) exchange rate on my imports.

Firm orders can also work to maximize your revenue when you repatriate as well. Let’s say I’m a US-based business that also sells shoes in the UK. If the British pound costs $1.30, I could set a firm order to only repatriate my funds from the UK if the pound strengthens to $1.40 — which would boost my revenue from the UK by 8% in this example thanks to the favorable currency movement.

Building a currency exposure plan for your business

Without a plan, the always-moving currency markets can put your overseas revenues and profits at serious risk. That’s why it’s crucial to have the right currency strategy in place so you feel in control.

Our experienced team can take the time to understand your business, and work out a plan that gives you the control, confidence, and flexibility you need. Get in touch with us at 737.209.4024 to get the conversation started, or click to see how we can help boost your bottom line.

Christian has been covering the financial markets for the past several years, and has written analytical and educational articles on everything from foreign exchange and stock investing to financial sector trends. His articles have been featured on Investopedia, Yahoo Finance, MSN Money, Business Insider, Nasdaq.com, and many other prominent sites. Before he became an editor, he worked in Austin's commercial banking industry for 7 years. Christian holds a B.B.A. in Finance from St. Edward's University in Austin.